Incentives and Consequences of the Shift to Zero-Based Budgeting in International FMCG Companies by the Case of the Kraft-Heinz Company and Mondelez Int.

The second step is zero-basing the activities of the company which should be continued to be rolled out and setting the priorities for all of these activities, with the purpose to outline the cost base of the company. The questions, which should be addressed at this point of time, are: "What activities can we not live without", "What activities can we stop", "What activities can we simplify or aggregate?", "Where can we define demand for activities?". Those questions have to be addressed, as far as even the company functioning in the leanest way, has some activities which are not primary and possibly do not bring any additional value to the company. Still, it is possible to outline some activities which have been historically supported, but currently do not serve a certain purpose or not needed anymore. At the same time, even those activities which are still required, might be performed in an aggregated or simplified manner.

The third step involvesan assessment of the outcomes by looking at the lists of activities by each function/department, compared to the market benchmark,

At the last stage, company should embed the changes into the operations and decide, what should be the frequency of budgeting from zero, how should the approach be discussed with employees on different levels, how will the company manage with the less prioritized activities and projects.

As we have stated above, zero-based budgeting can be expanded to any part of the organization: a function, a department, projects, entire organization. In case we look at a department's budget, it is necessary to write out a complete list of activities which are accomplished by department in an importance order, starting with those activities which are obligatory for the right order of operations, then all the optional, but still essential to support quality of the services. The last bucket of expenses would be specific optional activities, which do not have any significant impact on the operations just periodical benefits.

Moving to project expenditures within the confines of an organization or department, some projects can be less fundamental for the activity of the company than others. In this case, after being prioritized, some projects can be discontinued or suspended for a certain period of time.A list of activities can be depicted on a graph and visually outline all the prioritized projects, as it is shown on the graph 2. Certainly, even though a discontinuation of a long-term project seems to save significant amount of funds, it is still important to pay attention to the amount of investment which had been poured into the project and the period when it should start paying off.

Thus, in order to stay executed, both projects and departmental activities should pass some criteria and be either continued, terminated, simplified or held off.

Looking from the enterprise level at the complete picture of zero-based budgets from the side of different departments and functions, it is still necessary to examine whether the expenses by departments are aligned with the overall strategic plan of the company and are weighted by the importance of the organization, so that the major part of financial resources would not have been spent for eccentric departments(Chehade, Clark, & Biscardini, 2010).

So, in this sub-chapter we have investigated the features of ZBB in international companies, comparison of ZBB to traditional cost-cutting initiatives which are usually followed up by FMCG companies and a 4-step approach proposed by PWC for a successful shift to ZBB, which includes a reexamination of the entire vision of the company, bringing activities to a zero base, estimation of the outcomes and an implementation of the change into operations.

In the next chapter, we will focus on the case studies of Mondelez Int. and the Kraft Heinz Company in the process of implementation of ZBB and the outcomes of the performance.

2. The Transition from Traditional to Zero-Based Budgeting in Unilever And Mondelez Int.

2.1 The Current State of the Global FMCG Market

Before turning to the description of the transition from traditional budgeting to a zero-based one by international FMCG companies, it is necessary to focus on the market of fast-moving consumer goods and its specificities and find out the incentives for international companies in this sphere to adopt a different budgeting approach.

The first point which has to be taken into consideration is that FMCG market is a part of a larger market of consumer goods, which are created for the everyday private consumption. Despite of fast-moving consumer goods, the market of consumer goods includes as well slow-moving consumer goods, the description of which is above the scope of the current work. More precisely, FMCG industry refers to the frequently bought products with the lifespan less than one year, including packaged food, alcoholic and non-alcoholic beverages, personal care, household and cleaning products, apparel and footwear, tobacco, pet food& care(Statista, n.d.).

FMCG market is considered to be highly competitive with global companies leading the market due to their high dispersion around the globe, considerable investment into R&D and development of products according to the current and future trends. A distinct feature of FMCG companies is that different production stages are executed globally with adaptation to some markets in terms of product itself, packaging, positioning, etc.

As it was stated above, global FMCG market is shared by leading international corporations with Nestle AG, Procter & Gamble and PepsiCo taking the lead by net sales in U.S. dollars. The companies which we are focusing on - the Kraft-Heinz Company and Mondelez Int. are ranked as 12^th and 14^th correspondingly. In the Graph 1 you can see the first 15 leading FMCG companies worldwide in 2017 by net sales in US dollars.

Graph 1 - Leading 15 FMCG Companies Worldwide in 2017, Based on Net Sales (in million US dollars)

Source: (Statista, 2018)

In case we look deeper into the industry of packaged food (Table N), which includes the companies which we will examine further in this chapter, we will see that Mondelez Int. occupies the 3^rd position and the Kraft Heinz Company - the 5^th(Euromonitor International, Passport, 2019). The industry of packaged food includes such categories as snacks, dairy products and alternatives, cooking ingredients and meals, and staple food.

In their research, McKinsey detaches four cycles of the value creation by consumer goods companies, starting with 1967 to 2011, with the period between 1985 and 2000 being the most profitable due to an increased average revenue, soaring EBITDA margin (up to 646 basis points) and increased total returns to the shareholders. This period of time has been called as the Golden Age with the consumption of food, beverages and personal goods significantly incremented. Still, the revenue growth deteriorated the margin due to a decrease of the price.

Graph 2 -Top 10 Companies in Packaged Food in 2018, Based on Net Sales (in million US dollar)

Source:(Euromonitor International, Passport, 2019)

The next period between 2000 and 2007 was highlighted by merges and acquisitions with some mixed outcome in terms of value creation. The last period after 2007 till 2011 is known as Great Recession due to increased price level for the commodities, competition and difficulty to grow sustainably(Brennan, Kelly, & Martinez, 2013).

FMCG market, while being one of the most stable markets, is currently facing some challenges, which are responded by implementing zero-based budgeting into their operations. One of the challenges is changing consumer tastes, who want to buy from small, local brands, whom they perceive as being healthier, natural and honest towards its consumers. In this case, mass-produced products are not in the preference of millennials, so global FMCG companies who are historically decreasing costs by enjoying economy of scale, have to change their approach.In such an environment, BCG is stating that FMCG companies have to either launch smaller brands and jeopardize the integrity of the company or pay more attention to the costs and devote the expenses to the right places(Bokkerink, Charlin, Sajdeh, & Wald, 2017). The same idea was supported by Bain& Company in the article, where it was stated that in the majority of markets, large brands have lost a share to local companies and brands, and those results are consistent throughout different product categories (Meacham, Faelli, Gimйnez, & Blasberg, 2018).And, even though the growth from the core is still possible through better engagement with customers, focusing strategically on already existing brands, sustainable cost-cutting would play an important role.

The next challenge for companies in this field is the speed of responding to customer needs. While dealing with "fast"-moving consumer goods, companies have to be responsive and flexible, in order to react to the amount of real-time data which has been created though digital sources. According to BCG, leading FMCG companies launched a new product within 15 months, which is 7 months faster than an average FMCG company; to implement new format and product renovations has taken just 5 months by the fastest and 18 months by the slowest companies(Bascle, Ebeling, Pichler, Rizza, & Tsusaka, 2012). So, the company can improve the speed-to-market ratio by following certain steps, including standardization, prioritization and mechanization. Meanwhile, zero-based approach assumes that all the projects within the company should be standardized and put into life as fast and efficient as possible in order to avoid additional expenses.

As it is stated in the article of McKinsey, by 2025 for the first time the world will face the situation when the number of people with discretionary income will exceed those ones who barely meet the basic needs, what might play an important role for consumer goods business. However, the consumption growth will be distributed unevenly in different regions of the world, especially in emerging countries. Thus, currently existing global FMCG companies need to strategically plan the growth they choose to pursue and align the strategy with competitor's movements in the same markets. At the same time, advanced markets should not be left out of sight as far as those markets continue to grow and be trend-setters which will be transferred to emerging countries. In addition, some value can be created by niche opportunities in both advanced and developing countries, which can ensure the company higher returns, for instance, gluten-free products, less sugary snacks, etc.(Brennan, Kelly, & Martinez, 2013).

The next challenge which consumer goods companies are currently facing is the volatility and the overall increase in the commodity prices coupled with the inability to drastically increase prices, what has the influence on the margin indicator. Moreover, some companies become a subject of the supply risk because of several possible reasons: 1) concentration of production only in several countries; 2) overall shortage of the commodity in the future; 3) higher demand for the commodity which leads toa higher price and natural shortage; 4) higher demand boosts the price of logistics. All in all, for some commodities the price level can increase by 50-450 percent(Brennan, Kelly, & Martinez, 2013). Thus, because of the restrains which are set by the commodity costs, companies have to come up with the ways to support or increase the profit margin.

Digital technologies as one of the modern ways to advertise and sell the products has seen the light due to consumers not only moving into the digital space, but as well buying a growing number of products online. The analysis of the products which are researched and bought online can be seen in Appendix 1, with household product and grocery being among "still in store" category, which is promises to grow along the purchased online axe. Despite of the overall trend on digitalization,searching and shopping through mobile devices is gaining momentum, which means that a certain part of the marketing budget should be devoted to the mobile media(Brennan, Kelly, & Martinez, 2013).

Figure 3 -Digital Technology is Shaping all Markets and Categories

Source: (Brennan, Kelly, & Martinez, 2013)

Thus, we have dived into those challenges which lead to the conclusion that the budget within the organization should be distributed consciously - whether it is the fact that the commodity prices increase and influence the profit margin, or the necessity to invest into digital presence, faster response to the customer's needs, faster speed-to-master ratio. All of that means that companies should direct financial funding into those spheres which are required and get the money out of not value-added projects.

Evidently, companies are searching for a way to tackle the aforementioned challenges and come to the cost-cutting opportunities with the major purpose to increase the profit margin.

Thus, according to Deloitte, 22% of consumer-packaged goods (this sector is included into fast-moving consumer goods industry) companies have followed zero-based budgeting approach - for instance, Unilever, Kraft-Heinz, Mondelez, Coca-Cola, Anheuser-Busch InBev and Kellogg's(Deloitte Consulting LLP, 2016).Roland Berger is supporting the point of view that the major consumer goods companies are moving to the ZB budgeting in order to face a slow growth and low profit margin via the study, in which they have found out that out of those companies which apply ZBB approach, 71% keep the SG&A cost growth below revenue growth, while out of companies with other budgeting approach, just 44% manage to keep the same ration, as it is shown on the Figure 4. Moreover, in this study it was stated that those companies which do not apply ZBB, lose an opportunity to save at least 17% of their SG&A(Roland Berger, 2017).



Figure 4 - SG&A Versus Revenue Development of ZBB Companies

Source: (Roland Berger, 2017, p. 6)

Thus, for the aforementioned reasons, consumer goods companies are seeking to apply zero-based budgeting approach, expecting to cut annual costs between 600 million to 1 billion euros(Management and Advisory Service, 2017).

The last point to mention, we will see that international companies face challenging situation due to the fluctuation of exchange rates in developed and developing countries. For this reason, we will delineate the major exchange rate trend for the major countries in which companies run their operations. As far as we can see from the table with average currency exchange rate (national currency per US dollar), the major part of the currencies has depreciated against US dollar. It means that revenue from those geographic areas has decreased as far as a product even with a fixed price in local currency in dollars costs less than earlier. This aspect has had an influence on the net revenues.

Table 1 - Average Currency Exchange Rates in National Currency Units per dollar between 2014 and 2015

Source: compiled by the author on the basis of (OECD, 2019)

In the process of evaluation of the performance of the companies, we will utilize the adjusted indicators in order to avoid the influence of currency exchange effects, as well as an influence of different restructuring programs, impairment charges if any, acquisition integration costs, and others.

To sum everything up, in this sub-chapter we have focused on the consumer goods industry and specifically FMCG sector, which includes different types of products. FMCG sector is led by a number of global companies, such as Nestle APG, Procter& Gamble, PepsiCo, Unilever, Mondelez Int., the Kraft-Heinz company and others, which are operating in approximately the same categories of goods. While being a stable and long-term market, consumer goods industry is facing a number of challenges, among which are the decreased opportunities for organic growth, high saturation of the market, new consumer tastes and a rising trend for private label and small brands, and others. Those trends put the companies under pressure of cutting costs in order to improve the profit margin, however, some companies are applying zero-based budgeting in order to sustainably reduce costs and lead the company to a new level of profitability and efficiency.

In the next sub-chapters, we will focus on the case studies of two companies which have managed to implement such an approach into their operations.

2.2 The Case Study of The Transition to Zero-Based Budgeting by the Kraft Heinz Company

The first company we will be focusing on is the Kraft Heinz Company, which has been established in June 2015 after the merger of H.J. Heinz Company and Kraft Foods Inc., creating the 5^th biggest food and beverage company around the globe. In 2017, the sales were coming from such categories as condiments and sauces by 24,5%, cheese and dairy by 21%, frozen and chilled meals, and meat and seafood both by 10% and ambient meals by 9%(The Kraft Heinz Company, 2017, p. 1). A more precise distribution of net sales by the categories of products we can see on the graph N.

The Kraft Heinz Company includes such brands as Heinz, Kraft, Oscar Mayer, Philadelphia, Velveeta and others.



Graph 3 -Net sales of The Kraft Heinz Company worldwide in 2017, by product category (in million U.S. dollars)

Source: Compiled by the author on the basis of (Statista Dossier, 2019)

After the merger of 2015, the regional segments in which the newly established company is operating were reorganized into United States, Canada, Europe and the Rest of the World, which includes Asia Pacific, Latin America, Russia, India, the Middle East and Africa (RIMEA). Reporting according to such regions has started just in the third quarter of 2015(The Kraft Heinz Company, 2015, p. 6).Historically, the major part of the sales in the company comes from the United States, in 2017 the percentage accounted to 70,0% with a decrease of 0,4% to 2016. The sales in Europe accounted to 9,1% and in Canada to 8,3%, while the rest of the world held around 12,6% of the total sales(The Kraft Heinz Company, 2017). Meanwhile, the sales have partly transferred from the United States region to other countries - see more precisely on the graph 4.



Graph 4 -Distribution of the sales revenue of The Kraft Heinz Company worldwide from 2014 to 2017, by region (in million U.S.dollars)

Source:Compiled by the author based on(The Kraft Heinz Company, 2017, p. 26)

Organic net sales, as defined by the Kraft Heinz Company, is net sales excluding the impact of acquisitions, currency, divestitures and a 53^rd week of shipments. The impact of currency is calculated at a constant previous year's exchange rate despite ofVenezuela, for which the last year's results are calculated using the current year's exchange rate(The Kraft Heinz Company, 2017, p. 46).

The last 2018 year shown comparably positive result with Canada organic revenue growth of 0,1%, Europe - 3,4%, the rest of the world - 7,9% and the USA being the only region which has shown negative growth of 0,6%. In the US the main negative trigger was lowering prices (0,9 pp) and at the same time favorable volume/mix ratio (0,3 pp). In Canada, good volume/mix (0,7 pp) offset lowering prices (0,6 pp). Both European region and the rest of the world enjoyed both favorable volume/mix ratio (3,2 pp and 2,5 pp correspondingly) and increasing prices (0,2 pp and 5,4 pp correspondingly)(The Kraft Heinz Company, 2018, p. 11).In 2017, year-over-year growth of the organic saleswas mostly coming from the rest of the world (5,4% growth of organic net sales), while the regions of the United States and Canada were descending by 1,5% and 7,0% accordingly. The reason of such indicators in USA is connected to an unfavorable volume/mix ratio (1,9 pp) together with a higher pricing (0,4 pp), which has offset the final result. Canada has faced both unfavorable volume/mix (5,3 pp) and lower pricing(1,7 pp). Europe was the region with a positive organic net sales growth of 0,8%, which occurred from the favorablevolume/mix (1,7 pp) but lower pricing (0,9 pp). The region of RIMEA, or the rest of the world, has shown positive results due to higher price level (4,6 pp) and a favorable volume/mix ratio (0,8 pp).In all the regions, unfavorable volume/mix was triggered by distribution losses in some categories of products. However, the greatest impact of currency has been visible in the rest of the world with the negative influence of 1,5 pp., with Canada benefiting from the stronger currency(The Kraft Heinz Company, 2017, pp. 28-32).

Graph5 - The Kraft Heinz Company Organic Net Sales in 2015-2017 (dollars in millions)

Source: Compiled by the author on the basis of (The Kraft Heinz Company, 2017, p. 32), (The Kraft Heinz Company, 2018, p. 11)

The Kraft Heinz Company, while operating in a wide range of product categories, belongs to the global packaged food industry, which is growing in 2018 at the pace of approximately 2%, up to 1 percentage point from the previous 2017 year(Euromonitor Passport, 2018). In such a way we can say that the company is growing in some regions slower than the global market, while other regions such as Europe and RIMEA grow at a higher speed.

Before moving to the incentives and consequences of the implementation of zero-based budgeting in the company, it is worth explaining the process ofthe merger of Kraft Food Inc. and H.J. Heinz Company, and the role of other entities in it.

In June of 2013, 3G Capital and Berkshire Hathaway have completed an acquisition of H.J.Heinz Company, as it is stated at the corporate site of the currently Kraft Heinz Company(the Kraft Heinz Company, 2013). The deal was closed between Warren Buffett, the chief executive of the Berkshire Hathaway (#3 on the Forbes list of the wealthiest people, as of 2019), and Jorge Paulo Lemann, a Brazilian billionaire and one of the founders of the global investment firm 3G Capital (#35 on the Forbes list, as of 2019).Two years later, on the 5^th July 2015, a merger of the Kraft Foods Group and H.J. Heinz took place. As far as both companies have been public to the moment of merger, Kraft Foods' shareholders have got 49% and Heinz - 51% of the combined company. Moreover, Kraft shareholders have received a cash payment of $16,5 per each share they obtain(The Kraft Heinz Company, 2015, p. 7). Currently, 26,7% of the company belongs to Berkshire Hathaway, 23,9% to 3G Capital, 49,2% - to the public investors and 0,2% management ownership.

The approach of 3G Capital is to recognize and invest into companies which are already well-positioned in the market and are potentially prospective. The company especially focuses on the steadily growing retail and consumer goods sector, being the investors of such companies as Anheuser-Busch InBev, Burger King, Tim Hortons,H.J. Heinz, Kraft Foods Inc., and some others(3G Capital, n.d.). Overall, the company is known for using debt and cost-cutting techniques with the purpose to increase the profit margin and boost the growth. The idea behind such an approach is that venerable large companies in a slowly growing market will certainly get the customers who will be buying the products on a consistent basis, whatever happens to the company itself. It has been true until now, when the new trends have appeared in the market of FMCG products, which we have discussed in the previous subchapter.

The company has been using zero-based budgeting in all of the companies it invested in, including Burger King and the KraftHeinz Company, and was following the strategies of management and culture change, and a focus on efficiency and operational performance(McCullum, 2017).So, after the acquisition of H.J.Heinz by two companies, a significant cost-cutting process has started with the offboarding of 350 full-time employees out of the headquarters and the dismissal of some corporate possessions. The company has decreased the number of employees from 42thousand in 2014 to 32 thousand in 2017(Statista Dossier, 2019).Due to the compelling cost-cutting initiatives, the net profit margin has been improved up to 28% in two years in comparison to 17% beforehand, what is 75% better than the industry average(McCullum, 2017).

Two years afterwards, in 2015, a merger with a publicly-traded Kraft Foods took place, with some rumors of the following merger with some other FMCG companies like Unilever and Mondelez Int., however, none of them has been put into life. Moreover, Alex Behring, a co-founder of 3G Capital, claimed in his interview to Financial Times in 2017, that "Kraft Heinz doesn't need another acquisition to drive profitable growth for the long term. Right now, the company is focused on building great brands that consumers love and on developing top talent who can lead these brands into the future"(Financial Times, 2017). Still, Alex has made a notice that "as always, we will evaluate any opportunity that makes strategic sense, always with the objective of growing for the long term, whether in the US or internationally"(Financial Times, 2017). Consequently, we can draw a conclusion that currently 3G Capital is not bearing in mind any merger or acquisition, but just before they have identified a new potential target.

3G Capital manifestsevery expense as being a personal expense of its employees (personnel of the controlledcorporations), implementing zero-based budgeting into the culture of the company. Thus, almost in every area of the company's occupation, costsare questioned before they have been included into the budget, that lets the company improve profitability without losing its efficiency(Financial Times, 2017).

However, till now 3G Capital has been managing to strike the balance between irrational cutting costs and investment, which directly affects the consumer's decision to buy products and brings long-term value to the company. Even though some of the employees and media are making negative statements in regard to the company's harsh approach to cost cutting, including layoffs and downsizing, the company justifies it by the approach of meritocracy towards the personnel, which means that leadership in the company is based on capability and achievement(Financial Times, 2017)(Merriam-Webster, 2019). Meanwhile, the Kraft Heinz Company is supporting the relationship with some charity organizations and has committed to devote around $200 million to "Growing a Better World" initiative (which includes corporate social responsibility in regards to the environment, animal welfare, and others), has provided more than2 billion meals to the people in need(the Kraft Heinz Company, 2019) and has committed to provide 1 billion servings of meal more in the following 5 years (Rise Against Hunger, 2017). Thus, we can see that even in the frame ofthe zero-based budgeting, company is seeking to get rid of the "dead weight" in terms of meaningless activities and people but keep those ones which bring value to the company.

Further we will have a look at how the company has implemented ZBB into its activities and at the main indicators and their evolvement since 2015, when the merger between privately-owned H.J. Heinz and public Kraft Foods took place.In addition, we will cover some information related to H.J. Heinz, which has been acquired by 3G in 2013 and underwent the transfer to ZBB earlier.

In the first period of time after the merger, the Kraft Heinz Company was pursuing a strategy to drive organic growth, which is based on three pillars: increased marketing, focus on innovation and growth of profitability. First, the company intends to increase the expenditures into marketing to back up the top-line growth. Secondly, the company aspires to become the industry leading innovator in the industry of consumer goods, which means that the company should be able to invest into R&D, what is not correlated with the actual expenses into this function. Thirdly, the company aims to achieve the growth of profitability via product matrix optimization and animprovement of positioning to enable anincrease of the price level(The Kraft Heinz Company, 2015, p. 20).

On the other hand, the company is expecting significant cost reductions through COGS and SG&A. Exactly this part of the strategy implies an implementation of zero-based budgeting and an examination of all the overhead costs, which include, beside others,marketing and advertising, research and development costs. Thus, as far as the first part of the company's business strategy is focused on marketing and R&D, while the second one implies the reduction in these categories, we can assume that the company aims to make the expenses more efficient. In addition, to a certain extentthe cost reduction can result from the overlap of some functions of two companies and a sort of optimization of the entire strategy(The Kraft Heinz Company, 2015, p. 26).

Now we will move to the process of implementation of ZBB in the operations of first H.J. Heinz company and afterward into the entire Kraft Heinz Company. As we have already stated it, 3G Capital is famous for its positive attitude towards zero-based budgeting and overall cost reduction initiatives, and meritocracy. In 2013, when 3G Capital has just acquired the publicly traded H.J. Heinz, one of the first initiatives after the dismissal of a big part of employees was an introduction of a new approach to budgeting together with a changed culture inside of the company. First, we will start with the explanation of the exact steps which were undertaken by the company on the way to ZBB.

To get started, the company has identified the scope of ZBB implementation, thus narrowing down all the opportunities of a mere cost cutting to exact budget lines, such as all other costs despite of cost of goods sold, including overheads, marketing, distribution, R&D, and others.

At the next stage, cost packages are defined in the constrains of one function and are further divided into more detailed sub-packages, providing a better visibility of the entire spectrum of costs. The company is providing to its employees an extensive explanation of all the cost packages and sub-packages in a form of a document which is to read by all the ZBB stakeholders. Every possible cost belongs to a certain package, which can be both simple or complex.

Usually, packages are divided into the following categories:

1. Fees;

2. Institutional;

3. Legal;

4. Leases/Rentals;

5. People;

6. Variable Compensation;

7. Services;

8. Technology;

9. Travel;

10. Utilities;

11. Logistics support;

12. Maintenance;

13. Marketing;

14. Sales;

15. Supply Chain;

16. Transport.

To each of those packages, there belong several sub-packages, for example, into the lease/rentals we can relate lease of equipment, lease of real estate, and others. H.J. Heinz sets apart simple and complex packages. Simple packages have a higher ability of being compressed with a quite limited business risk, requiring the creation of policies and global consistency. Complex packages, on the other hand, are less capable of being compressed, require centralization and depend on the volume of the goods produced.Next, to each cost package twoowners are attached, one on the horizontal level(grouped by expense nature) and one on the entity vertical level. In parallel to this process, personnel education takes place, which we will cover further separately.

ZBB governance is arranged on three levels: country, zone and global ones. At the country level, country entity owners are communicating to zone entity owners and zone presidents, who, in their turn, are accountable to the top leadership at the global level.In parallel, on the country level there areemployees in charge of ZBB communicate to zone ZBB and zone package owners, and report to the global level(Winter, 2016, стр. 16). On practice, reporting takes around 4-5 weeks and first implies closing the books, then reviewing it with package owners, next -with ZBB zone reviews with the global level, finally, action plan is review. On a quarterly basis, the CEO reviews the packages.Facilitation of the reporting process is supported through standardized report documents. Package owners transfer the information via sub-package dashboard of a specific package, specific sub-package dashboard by country, risks and opportunities of the current indicators and an action plan for a specific package. Entity owners, on the other hand, prepare an entire entity dashboard by package in a specific country, risks and opportunities for the country and the successive action plan.

Thirdly, global ZBB policies are set to be followed by entity owners and package owners, as well as other employees who are in the position of using the company's money. Global policies prescribe the guidelines which are followed in any ambiguous situation and ensure a comprehensive and consistent compliance to the prescriptions. Despite of global, local policies can be set up which will ensure a better level of control.

As we have mentioned it above, in parallel to the process of ZBB implementation, staff education takes place, which sets an aim to change the entire behavior patterns of the employees in regard to spending corporate's money. Thus, despite of lectures and educational seminars, company is ensuring constant communication to the employees through email, reports onboth positive and negative deviation from the budgeted value. Even suchan action as showing a report of who prints the most, encourages people to pay more attention to their expenses(Winter, 2016).

Thus, having described the specificities of the approach to ZBB by the Kraft Heinz Company, we will move on to the actual results which the company has shown within the last several years starting with 2015 (which is the first year of the combined financial results), starting with adjusted operating income margin, organic net revenue, adjusted EPS, COGS, SG&A, advertising, R&D expenses and some others.

So, first of all, let us look at the gross profit margin, which reflects the amount of money left after deducting the cost of goods sold. This indicator will help us to understand whether COGS are used efficiently in the company. As far as we can see from the graph, in 2015 the gross profit margin was quite large in comparison to peer companies and increased it even more in 2016 and 2017 up to 37%, which might result from the implementation of ZBB and net revenue was growing faster than the cost of goods sold, which has helped to first achieve higher margins. Meanwhile, between 2015 and 2017 COGS have included 60% of the Integration Program costs, which accounted to $324 million in 2017, $711 million in 2016 and $404 million in 2017. However, in 2018 the gross profit margin indicator has fallen by 29 basis points down to 34,1% due to increased prices for the raw materials and the necessity to deepen the discounts in such key retailers as Walmart or Kroger(Tully, 2019).

Graph 6 - Gross Profit Margin between 2015 and 2018 in the Kraft Heinz Company

Source: (The Kraft Heinz Company, 2017), (The Kraft Heinz Company, 2018)

The next indicator we will have a look at is an adjusted operating income margin, which provides an understanding of the profit the company makes after paying all the variable costs but before tax and interest. Thus, we can see that the company has decreased the adjusted operating income margin even more than the gross profit margin. In 2015 the company has shown a high adjusted operating income margin in comparison to other companies in the same field. In 2017, the margin has increased due to a higher adjusted operating income which the company has obtained due to savings from the Integration Program (which have been divided between COGS and SG&A costs), restructuring activities, lower overhead costs (what we will look at further in the chapter), but offset by higher raw material costs in the local currency.

Graph 7 - Adjusted Operating Income margin between 2015 and 2018 in the Kraft Heinz Company

Source: (The Kraft Heinz Company, 2017), (The Kraft Heinz Company, 2018)

Meanwhile, the constant currency adjusted EBITDA has significantly grown in 2016 mostly due to cost savings initiatives, favorable net pricing the sales growth in the Rest of the World markets. Growth in 2017 is explained to be driven by lower overhead costs, other cost savings initiatives being offset by unanticipated cost increases in the last quarter of 2017.In 2018 the company faced deterioratedperformance in the US market in terms of higher SG&A costs, including advertising expenses.



Graph 8 -Constant Currency Adjusted EBITDA growth between 2015 and 2018 in the Kraft Heinz Company

Source: (The Kraft Heinz Company, 2017), (The Kraft Heinz Company, 2018)

In order to analyze the reasons behind margin growth or decline, and check the efficiency of ZBB, it is necessary to look at the SG&A costsand separatelyadvertising, R&D expenditures and pure selling& general costs.

SG&A cost as a percentage of net revenue has been significantly decreasing from 17% in 2015 down to 11,2% in 2017 and an increase up 10 pp in 2018. Such a decline in overhead in the period till 2017 has been the result of an intense work of the Kraft Heinz Company on zero-based budgeting, however, in 2018 the costs have increased, and we see the result of it in the decreased adjusted operating margin. The Integration Program, which started in 2015 following the merger, reached the end with the cumulative costs of $2055million incurred since the inception. Meanwhile, around 40% of the cost will be reflected in SG&A, which include severance and employee costs, asset-related costs. The total cost connected to the Integration Program recorded in SG&A would account to $98 million in 2017, $301 million in 2016 and $619 million in 2015(The Kraft Heinz Company, 2017, p. 64). Thus, one of the reasons behind lowering SG&A would be decreasing Integration Program costs.

Graph 9 -SG&A expenses as a percentage of net revenue between 2015 and 2018 in the Kraft Heinz Company

Source: (The Kraft Heinz Company, 2017) (The Kraft Heinz Company, 2018)

Research and development expenses as a percentage of net revenue have been decreasing steadily from 0,6% in 2015 to 0,4% in 2017. While such a decrease is logical from the point of view that the company is aiming to decrease overhead costs, it still diverges from the first part of the strategy when the company was expecting to support both advertising and innovation.



Graph 10 - R&D expenses as a percentage of net revenue between 2015 and 2017 in the Kraft Heinz Company

Source: (The Kraft Heinz Company, 2017)

\Advertising expenses have slightly risen in 2016 and in 2017 fallen till a lower level than in 2015. The rise in 2016 did not have a significant impact on SG&A in 2016 as its rate has anyway decreased. Thus, we can say that the drop of SG&A cost till 2017 partly resulted fromthe downward expenses ofR&D and advertising.



Graph 11 - Advertising expenses as a percentage of net revenue between 2015 and 2017 in the Kraft Heinz Company

Source: (The Kraft Heinz Company, 2017)

Despite of the influence of advertising and R&D cost, we see that the rest of the overhead was decreasing as well (the aforementioned costs are deducted from SG&A), which include those costs which have been stated earlier in the sub-chapter (fees, institutional, travel, etc.).

Graph 12 - Selling and General expenses excluding advertising and R&D costs as a percentage of net revenue between 2015 and 2017 in the Kraft HeinzCompany

Source:(The Kraft Heinz Company, 2017)

Organic net revenuedeclined in 2015 in comparison to 2014 due to primarily unfavorable volume/mix ratio (2,6 pp) which resulted from lower shipments of products in the United States and Canadabut partially offset by the growth in the rest of the world. In 2016, organic net revenue increased and reached 0,3% due to better pricing in some regions and neutral volume/mix. In 2017, organic net revenue shown a decline of 1 percent again due to unfavorable volume mix (an impact of 1,5 pp) and higher pricing (0,5 pp).However, 2018 has shown good results of 0,8% growth in terms of organic net revenue due to an improved volume/mix by 0,9 pp with an increased consumption in North America and the growth of such categories as condiments and sauces in Latin and North America, and EMEA, and a decrease of the price level by 0,1pp.

Graph 13 - Organic Net Revenue growth between 2015 and 2018 in the Kraft Heinz Company

Source: (The Kraft Heinz Company, 2017), (The Kraft Heinz Company, 2018)

Capital expenditures as a percentage of net revenue have grown in 2016 and 2017but were staying at an approximately the same level.

Graph 14 - Capital Expenditures as a percentage of net revenue between 2015 and 2017 in the Kraft Heinz Company

Source: (The Kraft Heinz Company, 2017)

On the basis of the capital expenditure, we can calculate the free cash flow generated by the company by deducting capex out of cash from operating activities. In 2017, the company has shown a lower than previouslynet cash provided by operating activities due to several reasons, primarily because of a $1,2 billion pre-funding of the postretirement benefit plan, lower collections on receivables, increased employee bonus payments(The Kraft Heinz Company, 2017, p. 34). Thus, the free cash flow occurred to be negative in 2017 which meant that the company did not have enough liquidity for operations.



Graph 15 - Free Cash Flow between 2015 and 2017 in the Kraft Heinz Company (in million $)

Source: (The Kraft Heinz Company, 2017)

Adjusted Earnings per Share have significantly increased in 2016 and 2017 due to adjusted EBITDA growth, redeemof the preferred stock and tax favorability. In 2018, adjusted EPS was influenced by lower EBITDA, higher depreciation costs and interest expenses.



Graph 16 - Adjusted Earnings Per Share growth between 2015 and 2018 in the Kraft Heinz Company

Source:(The Kraft Heinz Company, 2017), (The Kraft Heinz Company, 2018)

The long-term debt has increased in 2015 in comparison to 2014 almost twice from $13 352 million to $25 151 billion primarily due to the merger which took place in 2015, and it has increased in 2016.



Graph 17 - Long-Term Debt and Interest Payment between 2015 and 2017 in the Kraft Heinz Company

Source:(The Kraft Heinz Company, 2015),(The Kraft Heinz Company, 2017)

After having analyzed the key performance indicators of the Kraft Heinz Company, we will have a look at the recent announcement which the company has disclosed in the last report of the 4^th quarter and full year 2018 results, claiming that during the last quarter of 2018, "the fair values of certain goodwill and intangible assets were below their carrying amounts", leading to non-cash impairment charges of $15,4 billion "to lower the carrying amount of goodwill"related toNorth American refrigerated and retail business ($7108million) and an intangible asset ofthe Kraft and Oscar Mayer trademarks($8332million)(The Kraft Heinz Company, 2018, pp. 2, 9). Despite the fact that the company conducts regular estimations of impairment amounts,it made theadjustmentof impairment loss of $500 million in the 3^rd quarter of 2018 and the decrease of the goodwill(The Kraft Heinz Company, 2018, pp. 3, 5).

For the reason of goodwill and intangible asset impairment losses, the company generated negative net income, adjusted EBITDA decreased by 13,9% and the regular quarterly dividend decreased from $0,625 to $0,40, a reduction of $0,225(The Kraft Heinz Company, 2019). In addition, the company has revealed the information about receiving a subpoena from the Securities and Exchange Commission in October 2018 related to the investigation of the procurement function, including accounting policies, internal control, agreements and other documents(The Kraft Heinz Company, 2018, p. 4).

After reporting the information about the SEC investigation and a write-off of $15,4 billion on 21 February 2019, the market reacted the next day by aninstant drop of the share price by 36,96% from $48,18 to $34,95and a continued downward trend with the minimum share price of $31,89reached on 12 March 2019(Finance Yahoo, 2019).

Graph 18 - Share price of the Kraft Heinz Company in 2019

Source: (Finance Yahoo, 2019)

Together with quite disappointing, from the side of the market, results of 2018, the company outlines the 2019 plan "of becoming the best" consisting of 3 steps: 1) sustaining commercial momentum; 2) active management of the portfolio and 3) strengthening the balance sheet(The Kraft Heinz Company, 2019).

The first step includes such activities as brand support through the next-generation marketing, leveraging category management via a better assortment matrix and an improved channel distribution, driving consumption in the regions of presence.At the second step, the company aims to leave the non-competitive areas and improve portfolio's growth, sell out the non-efficient assets and, what is interesting, the company claims to apply their experience for the strategic M&A. Lastly, the company wants to dedicate the proceeds from divestitures to the debt reduction with the purpose of capital structure improvement. The achievement of the results is forecasted at 2019 with a different strategy starting with 2020 on.

From the financial point of view, the company expects to improve the organic net sales with the help of increased consumption, improved volume/mix from innovation and distribution, maintaining industry-leading margins despite of increased support of marketing, innovation, e-commerce and people(The Kraft Heinz Company, 2019, pp. 6-8).

The write-down on the iconic brands, which had been even claimed to be focused on in the development strategy,means that the company estimates those brands as less valuable than after the merger.It can be concluded that currently the company fails to meet the demands of the market and the challenges to the entire industry which we have covered in the previous sub-chapter. Consumers seek to get healthy food which is providing them with the outstanding experience, and the company is not yet able to meet those expectations. The possible reason behind it is the decrease of the R&D and advertising expenses, which aim to convert people into loyal consumers andprovide them with new products or product features, different from other brands.

During the period of time between the moment of merger in 2015 and 2018, the company was prioritizing the culture of "ownership and meritocracy", which was including zero-based budgeting, leadership approach towards personnel, focus on margin improvement.As we have seen it from the performance of the company in this period of development, it has managed to achieve the margin growth and significant cost reduction till 2017, however, the last year has shown that the company needs to correct its strategy towards innovation, modern marketing techniques, driving competitive advantage. Starting with 2020 on, in addition to just mentioned activities, the Kraft Heinz plans to grow top and bottom line through innovation, whitespace activities, driving sales growth and manage portfolio, while still keeping an eye on the cost control(The Kraft Heinz Company, 2019, p. 9). With the help of those initiatives, the company will manage to improve its share price and gain the lost evaluation.

2.3 The Case Study of the Transition to Zero-Based Budgeting by Mondelez Int

The second company which we will be examining in regard to its implementation of zero-based budgeting into its operations is Mondelez Int., the number three company in packaged food industry in 2019 (in comparison to the Kraft Food Company, which takes the 5^th place in this ranking) after Nestle SA and PepsiCo Int.(Euromonitor International, Passport, 2019). In 2018, the company was occupied in 5 product categories, such as biscuits, chocolate, gum& candy, beverages, cheese& grocery. The distribution of the sales by categories has been the following (see graph 19).

Portfolio of Mondelez Int. includes such brands as Cadbury, Milka, Toblerone, Oreo, belVita, Trident gum and others.



Graph 19 -Distribution of Net Revenues by Product Category in Mondelez Int. in 2018

Source: Compiled by the author on the basis of (Mondelez International, Inc., 2018, p. 4)

It is worth noticing that the snacking category, to which Mondelez Int. belongs, has been growing by 2,7% during 2018 and is estimated by Nielsen Global Datato grow 3%+ in the future(Mondelez International, 2019, p. 16). Total snacks of Mondelez have been growing at the pace of 2,6%, a bit lower than the category, while biscuits grew by 2,8%, chocolate by 3,5% and gum& candy by just 0,1%. Meanwhile, Mondelez Int. was possessing a 21% share of this market in 2018(Mondelez International, 2018, p. 12).

While being an American corporation, Mondelez Int. sales mostly come from the European region (in 2018, this region accounted to almost 40% of the sales) and the North of America (26,5% of total sales in 2018). The change has taken place in 2014, when the share of Europe has decreased by almost 7%, whereas North America, Latin America and the region of AMEA gained momentum. Since then, the relative size of the regions stayed approximately the samewith Latin America slowly shrinking and North America increasing the volumes of sales(Mondelez International, Inc., 2018, p. 3).

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